In Part 2 of this two-part series, I discuss the variety of reasons why housing inventory has dropped to such low levels in Boulder County.
Work from home
Now that people can work remotely, many urban dwellers are choosing to move out of larger cities to suburban areas where they can enjoy more space, high quality of life, and the outdoors. For this reason, Colorado has been an attractive place for new residents. This has put more pressure on Colorado’s housing markets across the state.
In fact, according to Bankrate, Colorado is the #9 top state for population growth. According to the 2021 Colorado Business Economic Outlook Report from the Leeds School of Business, the state population grew by 55,300 people in the past year.
In addition, migration to and from cities and towns within Colorado also affects regional housing markets, including Boulder County and the Front Range that continue to see population increases. Meanwhile, Colorado mountain and resort towns have seen a surge of families relocating to what used to be primarily a second home market. There, they can live near ski slopes and outdoor recreation areas. Bringing the kids along and telecommuting has tested the local infrastructure with large increases in public school attendance and demand for healthcare, transportation, and other services.
People are living longer and not leaving their homes
In Boulder County, the population of older adults 60+ is rising and growing faster than it has ever before, according to the Aging in Boulder County 2019 report from the Boulder Area Agency on Aging, and “adults 80+ years old are projected to increase 244% by 2050.”
Fifteen or 20 years ago when people lived into their seventies and eighties, the next move might have been to transition to an assisted living facility or a senior community. Today, many seniors are staying in their homes as long as they can. In addition, due to COVID-19, seniors may be very wary of moving into senior housing or retirement communities. Seniors can continue to live independently because of the variety of services to help them that have emerged. These services include mowing their lawn and landscaping, house cleaning, home companions, transportation, and more. As seniors live in their homes longer and a higher percentage of the population are older adults, more properties are kept off the market.
Post-COVID-19 employment numbers
Prior to the COVID-19 shutdown and after the 2007 to 2012 recession, Boulder County’s unemployment rate had been under 3%. Once the COVID-19 shutdown hit, the unemployment rate jumped to almost 10%. It’s too early to tell, but as more of the population is vaccinated and businesses start to reopen, job growth is likely to rise, reducing the unemployment rate. When you consider factors impacting the real estate market, employment numbers are even more important than interest rates. Even if the interest rate is zero, those who do not have jobs find it very difficult or are unable to make their mortgage payments. The local economy in Boulder County continues to fare better than many areas of the country due to its diversified industries including high tech, research, bioscience, aerospace, cleantech sectors, and more. During COVID-19, the hardest hit businesses have been in retail, restaurant, and hospitality sectors. There are also many businesses that are thriving as a result of COVID-19. The bottom line is that employment numbers will continue to improve, leading to more home buyers and added demand in the real estate market.
Record-low interest rates
As employment has continued to improve, we have also witnessed record low interest rates for an extended period of time. Low interest rates combined with job growth and low unemployment has meant that a greater number of qualified buyers have entered into the housing market. Because there are so many qualified buyers in the marketplace, competition for available properties has become fierce, especially in the lower half of the price range. The graph below, derived from Freddie Mac statistics, shows historic interest rates back to 1971.
Marijuana and Craft Beer Industries
The thriving marijuana and craft beer industries in Colorado added an extra boost to our economy before the pandemic began.
However, grabbing a beer with your friends at the local brewery or taproom was shut down due to COVID-19, and craft beer businesses have since suffered. In contrast, marijuana sales have skyrocketed. Nevertheless, these businesses will likely recover rapidly as more people are vaccinated and are anxious to go out. We hear stories from local real estate agents and mortgage lenders that the marijuana and craft beer industries attract those moving here from out of state – for lifestyle and job opportunities. The more people who decide to relocate here, the more pressure on our already tight housing inventory.
Mass Purchase of “First Time Homes” by Investor Groups
Towards the end of the recession, lenders across the country took back thousands of homes in foreclosure and sold off big bundles of homes to investors. Because the investors were able to buy housing stock in bulk at a very low price, they have for the most part, kept this housing as rentals and have not introduced many of those homes back to the for-sale market.
Colorado Construction Defects Law
The construction defects law – which made it easier for condo owner associations to sue builders in multi-million-dollar lawsuits – has also had a significant impact on our current housing market.
Driving around the Front Range, for example, you see all sorts of new buildings that look like new condos, but most of them are not condos – most of them are
apartments to be leased. That’s because developers don’t want to take on the liability that the construction defects law places on them. Due to the current strength of the rental market, the developers are finding it is better to build and rent as opposed to build and sell the individual units.
This is keeping a huge supply of entry-level housing off the market. It is possible that many of these units could convert to condos at a future date, increasing the number of condos available for purchase.
Lack of Capital Gains Tax Exemption Increase
Before May 7, 1997 the only way to avoid paying capital gain taxes when selling your home was to upgrade to a more expensive house within two years of selling your old house. Sellers who were age 55 and older had an additional once-in-a-lifetime option of exempting $125,000 in profit from their home sale. In the 1997 Taxpayer Relief Act, the home sale exemption was updated: a single person could exclude $250,000 in gain and a married couple $500,000 in gain when they sold their personal residence. The only catch was that the owner needed to live in the home two out of the last five years to qualify for the exemption. This rule change made it much easier for someone to sell their home and downsize without paying taxes.
In the recent Tax Reform 2018, this protection from capital gain taxes has been kept in place.
However, this issue today affects our housing inventory, especially in Boulder. In 1997 the average price of a single-family home in Boulder was about $350,000. Today the average price of a single-family home in Boulder has risen to over $1 million. Yet the home sale exclusion has remained the same at $250,000 for a single person and $500,000 for a married couple. The current capital gain exemption no longer provides an adequate incentive for an owner to place their home on the market – and this keeps housing inventory low.
Waiting for “Stepped-Up” Basis When First Spouse Dies
With home prices having risen substantially, the capital gains exemption for home sales is no longer a strong incentive to put your house on the market. In many cases, when the gain is well over $500,000 it makes sense for a married couple to wait until the first spouse dies. That way, if the surviving spouse jointly owns the
home with the right of survivorship, half of the home’s value will be transferred on a “stepped up” basis and will not be subject to capital gains taxes. In addition, the survivor, now single, will qualify for the $250,000 home sale exclusion. Waiting for that first spouse to die leaves another home off the market.
Seller who doesn’t need to sell – why sell now? Wait longer and it will sell for more
In times of an appreciating market, the seller who doesn’t really have a motivation to sell will just wait to sell at a later date with the expectation that the home will be worth more. With sustained home value appreciation in the Boulder market, we are seeing sellers willing to wait longer. Once sellers sense the market is slowing and has reached its temporary peak, there could be more properties coming on the market.
Housing shortage tracker
The National Association of Realtors
® has a housing shortage tracker that computes how many new permits are issued for every new job in 178 metropolitan areas. It shows Boulder as having a housing shortage. You can check this tool out at: nar.realtor/ research-and-statistics/ housing-statistics/housingshortage- tracker
In conclusion, the Boulder market has been in an appreciation cycle since the end of the recession in 2012. Most real estate cycles enjoy five- to seven- year upswings.
Because of the multi-faceted factors listed in this article, we are likely to see a strong market for a period longer than the typical real estate cycle.
Duane Duggan has been a Realtor for RE/MAX of Boulder in Colorado since 1982 and has facilitated over 2,500 transactions over his career, the vast majority from repeat and referred clients.
He has been awarded two of the highest honors bestowed by RE/ MAX International: The Lifetime Achievement Award and the Circle of Legends Award. Living the life of a Realtor and being immersed in real estate led to the inception of his book, Realtor for Life. For questions, e-mail DuaneDuggan@boulderco.com, call 303.441.5611 or visit BoulderPropertyNetwork.com.